Historically, Fortis Inc (TSX:FTS)(NYSE:FTS) has been one of the best-performing TSX utility stocks. Over the past five years, when TSX utilities as a whole rose just 13.5%, Fortis shares increased about 54% in value–easily beating the industry average. It’s not hard to see why. With steady earnings growth and an uninterrupted 45 year dividend growth streak, Fortis has been an income investor’s dream come true.
Of course, when investing in dividend stocks, you always need to ask yourself whether earnings are growing enough to keep up the payments. If a stock keeps upping its dividend without a corresponding increase in earnings, then its payout ratio can reach dangerously high levels.
Over the years, Fortis has managed to increase earnings enough to raise its dividend without pushing its payout ratio to unsustainably high levels. Now, the company is embarking on a $17.3 billion capital expenditure plan that it says will increase its rate base by 7.1% CAGR over five years.
What is a capital expenditure plan?
A capital expenditure is money spent acquiring or maintaining hard assets, like land, buildings and equipment. Based on this definition, we can infer that Fortis is spending money on buying physical assets that it thinks will increase its rate base significantly, or on improving its existing assets. With that established, the next question is: what is Fortis spending $17 billion on in its five year capital expenditure plan?
What Fortis is spending the money on?
Fortis’ 2018 annual report press release includes a brief section on its five-year spending plan. In it, management states that it will be spending $17 billion on system capacity, safety features, electrical grid improvements, cyber security and clean energy. Grid modernization is a huge focus of the plan; Fortis has touted this as a major contributor to improved energy transmission that could improve the company’s margins.
The plan also involves building some totally new facilities, including an LNG terminal in B.C., an energy transmission project in Ontario, and a pumped storage project in Arizona.
Investments in renewable energy
One major focus of Fortis’ capital expenditure plan is renewable energy. In a press release dated March 29, the company outlined several renewable energy projects it had invested in, including the $370 million Oso Wind Farm (through its subsidiary Tucson Energy). In many regions, wind energy is cost-competitive with other, less renewable energy sources, so this could turn out to be a big earnings booster for Fortis.
Foolish takeaway
Fortis has a long track record of spending money in a way that increases profitability. Should past trends continue into the future, the company’s $17 billion five-year plan should reward shareholders handsomely. The cost of the plan is a potential area of concern, but with the right investments, it should be ROI-positive.
